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Published: Tuesday, 3/25/2008

Reform is due on many fronts of economy

It appears that Americans, caught in an ugly economic downturn, are ready for some regulatory reforms after a quarter-century of deregulation and laissez-faire attitudes about the market place.

In some ways, the current economic situation is starting to look a lot like the 1930s - the Great Depression era that brought such significant reforms as the U.S. Securities and Exchange Commission, the Federal Deposit Insurance Corp., and the concept of monthly amortization of home mortgages.

Almost everyone assumes that a recession is in the cards, and some economists are even daring to mention the "D" word.

Nobody is suggesting a depression of the magnitude of the 1930s, but there are some eerie similarities - falling real-estate values, a housing crisis that includes high foreclosure rates, a credit crunch, and the collapse or near-collapse of some large financial companies.

All that's missing is a stock-market crash. We had one just a few years ago, and the current market is hardly booming.

And in 2008, just as in 1932, political change is in the wind.

The bursting of the dot-com bubble was followed by the bursting of the housing and subprime-mortgage bubble, and who knows what other sort of bubble is out there?

After the crash of 1929, stocks fell for three straight years, bot-

toming out at less than 20 percent of pre-crash value. Finally, the public and Congress saw the results of lax regulation, and in 1934 the SEC was created.

It took the failure of more than 9,000 banks from 1930 to 1933 to create enough pressure spur an FDIC to insure deposits. (Many Toledoans participated in the pain, with the failure of half a dozen local banks and the drastic restructuring of another half dozen.)

The housing debacle of the 1930s led to several major reforms in the mortgage industry. New agencies included the Home Owners Loan Corp., which helped a million distressed homeowners work through their defaulted mortgages; the Federal Housing Administration, which insured mortgages, allowing lower down payments; and the Federal National Mortgage Association, or "Fannie Mae," which has been a major housing financier since 1938.

In additio n, the United States Housing Act of 1937 established the nation's first public-housing programs.

One of the biggest changes coming out of the Great Depression was homeowners' ability to pay down their mortgages through monthly amortization, beginning in 1934.

Until that time, a home buyer typically had to put 50 percent down and finance the rest with a term mortgage of perhaps five years. The homeowner would pay interest during that term, but at the end had to pay off the principal or get another term loan. But after 1934, each monthly payment pays off a portion of the principal.

Certainly Congress and federal regulators will be scrutinizing abusive mortgages in light of the mortgage meltdown. But reform shouldn't stop there.

Hopefully, the government won't go overboard on reform, but it surely needs to control excessive interest rates and credit fees that once would have been considered usurious. It needs to monitor payday loans and rent-to-own businesses. It needs to clamp down on off-book corporate transactions, such as derivatives, that can boost shareholder risk tremendously.

Regulators need to increase transparency of corporate actions that affect the value of stock.

While Congress is considering measures to protect the battered investors and consumers, how about an energy policy that rewards conservation instead of consumption? And how about fixing the Social Security system so that it will be around for our children, too?



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